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How Funding Circle Lenders Will Survive A Terrible Economy
The oldest business and property P2P lending company has checked out how us lenders would come out of an economic disaster.
Funding Circle asked Hymans Robertson, an external consultancy, to conduct the same “stress tests” on it as the banks have been required to do by the Prudential Regulation Authority since the Great Financial Crisis of 2008.
The stress test situation was:
- The economy shrinks 4% – meaning business shrinks as less goods and services are sold.
- The base rate of interest rises by close to four percentage points, which means that borrower interest rates might rise by a similar amount.
- Inflation goes up from under 2% to peak at 6.6%.
This is not the worst situation that could occur to the economy, but it would be a serious shock.
The main takeaways of the stress test are:
- Lenders on Funding Circle would see their average annual returns after fees and bad debts would remain above 5.5% the entire time, down from 6.7% currently.
- Average bad debts would rise from 2.2% to 3.4% on a yearly basis at the peak.
- Several high-street banks fail these tests while Funding Circle comes out with flying colours.
You might get less than the expected interest shown if you're unable to keep your money lent out 100% of the time, although in panic situations like this you might actually find that easier.
Also, you could easily suffer far worse bad debts if you haven't spread your money out across lots of companies.
It's better than a kick in the teeth
A lot better. Consider that the P2P lending companies that are often touted as the safest and easiest to use, often because of bad-debt provision funds, almost all pay lower than 5.5% today. One of them, RateSetter, pays closer to 6% if you lend for five years, but that is a rarer exception.
Unsurprisingly, to us, it seems that the fact of having a bad-debt provision fund itself forces both risks and rates down. That's why we think that Funding Circle will, on average, provide higher returns, but they'll also be more spotty.
If you're earning 5.5% you'll be getting poorer
If inflation rises to 6.6% at its peak and your interest after bad debt and fees falls to 5.5%, your account balance will keep rising – but you will still effectively be getting poorer. Especially since you still have to pay taxes on the interest you've earned.
However, while you'd lose ground for a time, those using savings accounts will likely lose much more ground than they do usually.
Within two years, you could probably expect your bad debts to fall again and your takings to rise, according to the results of the stress test.
This is just a test! I repeat…
Stress testing is useful and sensible, but it is nothing like the real thing. There will undoubtedly be some bigger losers in this situation, although the worst hit will be the ones who didn't spread their risks by lending across lot of loans.
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